As a new year gift to customers, the State Bank of India (SBI) has cut down on its base rate and benchmark prime lending rate (BPLR) by 30 basis points each.

The SBI's base rate now stands at 8.65% from previous 8.95%, and BPLR is at 13.40% from earlier 13.70% for existing customers.

As per normal practice, whenever SBI makes any changes either in savings or in lending rates, other banks follow the suit. Mostly this happens, when RBI goes for reduction in policy rates, lenders also reduce their base rate.

PK Gupta, Managing Director – Retail and Digital Banking, SBI, said, “This reduction is part of bank's efforts to ensure transmission of reduction in the policy rates in the recent past."

Currently, base rate of private banks like HDFC Bank and ICICI Bank is at 8.85%, while Axis Bank at 9%. Among state-owned ones, the base rate of Bank of Baroda and Punjab National Bank stand at 9.15% and 9.35% respectively.

Let us try to understand how does it affect common people.

What does this mean to loans?

Base rate

Base rate are referred to as the minimum interest rate of bank, below which a bank cannot lend – except for DRI allowances, loan to bank's own employees and loan to bank's depositors against their own deposits.

As per the RBI guidelines, banks are supposed to revise the base rates at least once every quarter. However, banks can review the base rates more than once a quarter.

BPLR

Prime lending are those rates which lenders refer to charge their customers with good credit history. Lenders are free to set their BPLR.

However, base rate replaced the BPLR regime from July 2010, since then importance of BPLR is restricted for loans given before July 2010.

Under such cases, the Central bank has given freedom to banks for continuing the BPLR system on which the loans were approved.